EU wins right to impose $4bn fine on 'unfair' US exports Â

Europe won a moral victory in the transatlantic trade war yesterday when arbitrators said the EU can impose $4bn (£2.6bn) tariffs on US exports – by far the biggest sum permitted to date – to compensate for illegal American tax breaks.

The ruling by the World Trade Organisation (WTO) strengthens the hand of the authorities in Brussels as they war with Washington over other disputes, including the US decision to impose tariffs of up to 30 per cent on imported steel.

But it also leaves EU officials with a dilemma. Imposition of the $4bn sum could prompt retaliation from the US and run the risk of depressing world trade and strangling economic recovery.

Transatlantic trade is worth $600bn a year and both sides have an interest in keeping disputes under control.

Washington has promised to change the tax breaks for US exporters, called Foreign Sales Corporations, which saved the Boeing Corporation $291m in 2000 alone. And the signs from the European Commission indicate that it will not seek to impose sanctions quickly.

The ruling ends a saga that dates back 30 years and follows an earlier WTO decision that America's tax rules discriminated against foreign firms.

In awarding $4bn in annual compensation, the arbitrators gave the EU the figure it requested; Washington had argued that it should amount to no more than $1bn.

The ruling delighted officials in Brussels, although they were anxious to stress their efforts to reach a negotiated solution. Pascal Lamy, the EU trade commissioner, said the ruling made "the cost of non-compliance with [the] WTO crystal clear" but that "President Bush took a first, important step at the last EU-US summit by stating that the US administration will do everything in its power to comply."

The US trade representative, Robert Zoellick, said he was "disappointed that the arbitrator did not accept the lower figure put forward by the United States" but added that "the findings will ultimately be rendered moot by US compliance with the WTO's recommendations and rulings in this dispute."

Observers agree that the EU has a delicate hand to play and that imposition of the full $4bn is unthinkable.

Nick Clegg, the Liberal Democrat spokesman on trade in the European Parliament and a former EU trade official, said the EU is "fully entitled to use this stick very aggressively to change US behaviour".

But he added: "This is giving the EU the largest weapon ever handed legitimately to anyone, to use against their biggest trading partner. Like all nuclear weapons, it is best used for deterrence."

During the next 10 days the Commission will draw up a list of products on which the EU could levy tariffs of 100 per cent, allowing a further 60 days for consultation with the 15 EU member states. The items will be restricted to those that will not disadvantage EU importers.

Nikos Zaimis, from the Commission's WTO unit, said the EU saw sanctions as "a last resort". He said: "We are patient but patience has its limits."

One key deadline was November's mid-term Congressional elections in the US, he said. If no new legislation was agreed by then, it would have to go before the new Congress, which would, Mr Zaimis said, take things "back to square one".

The scale of the compensation dwarfs that made in any other case. The WTO's two next-highest awards – $221m in damages granted to Canada over loans to the Brazilian aircraft manufacturer Empresa Brasileira de Aeronautica SA, and a $201.6m award to Ecuador over the EU's banana import rules – were never imposed.